introduction to farm and ranch accounting

INTRODUCTION TO FARM AND RANCH

ACCOUNTING

USING QUICKEN

Larry K. Bond Extension Economist and Associate Professor

Department of EconomicsUtah State University

May 1995Economic Institute Study Paper ~ ERI 95-03

PREFACE

This publication has been written to help the Quicken user understand the difference betweentractional accounting procedures and the way Quicken does things to accomplish the same result.It is not meant to be an introduction to Quicken. Probably the majority of those who use Quickenuse it only as a convenient way to record the checks they write and to assign a category to eachcheck so they have some idea where their money is going.

Those who have had some exposure to Quicken will be able to concentrate more on the processthan the procedure, and will be able to master the concepts more quickly. Moreover, those whohave been exposed to double-entry accounting will find this a good refresher course in accountingbasics. If you have not had a class in accounting, or have never used Quicken, it will take a littlelonger to get to the point where you can set up your own set of books and start making entries.However, by following the steps in the Hints on Doing the Exercises, found at the end of thispublication, you should be able to learn rather quickly.

Larry K. Bond

TABLE OF CONTENTS

ACCOUNTING BASICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

QUICKEN ACCOUNT TYPES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SAMPLE TRANSACTIONS USING QUICKEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Open a Bank Account with $10,000 of Initial Equity (1) . . . . . . . . . . . . . . . . . . . . . . . 5Purchase Equipment using Money in Checking Account (2) . . . . . . . . . . . . . . . . . . . . . 8Purchase Equipment with a Note Payable (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Purchase Labor Input using Money in Checking Account (4) . . . . . . . . . . . . . . . . . . . 11Purchase Operating Inputs using Money in Checking Account (5) . . . . . . . . . . . . . . . 12Purchases Repairs on Open Account (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Purchases Fuel using Credit Card (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Deposit Money from Wheat Sales into Checking Account (8) . . . . . . . . . . . . . . . . . . 16End-of-Accounting Period Accrual Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Wheat in Inventory Awaiting Sale (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Unused Supplies in Inventory (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Record Expenses Associated with Accounts Payable (11) . . . . . . . . . . . . . . . . . . . . . 20Record Expenses Associated with Depreciation (12) . . . . . . . . . . . . . . . . . . . . . . . . . 21

SUMMARY OF FINANCIAL POSITION AS OF 5/31/93 . . . . . . . . . . . . . . . . . . . . . . . . . . 22Next Accounting Period Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25End-of-Accounting Period Accrual Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Summary of Financial Position as of 6/30/93 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

FINAL COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Hints on Doing the Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

INTRODUCTION TO FARM AND RANCH ACCOUNTING

Accounting is the process of recording, summarizing, analyzing, and controlling financialactivities, permitting users of the information to make informed judgments and decisions. Untilrecent years, even computerized accounting required a knowledge of double-entry accountingprocedures. However, several software companies have developed record keeping programs thatare quite easy to learn and use. Many were originally designed for home and small businessesthat wanted nothing more than a computerized check book or the keeping of simple income andexpense records, yet had other features such as budgeting and cash flow. With each new version,features and flexibility were added until some are capable of keeping what might be considered adouble-entry set of books.

The software program “Quicken” is the most popular software program in the world because ofits ease of use. It uses new concepts and technology to eliminate several steps in the conventionalaccounting cycle, although it does have limitations. While Quicken was not designed as adouble-entry accounting system, it does have that capability. This paper illustrates how it can bedone.

ACCOUNTING BASICS

The double-entry accounting system is based on three elements: assets, liabilities and owner’sequity. The relationship among the three elements is expressed in a simple mathematical formknown as the fundamental accounting equation:

ASSETS = LIABILITIES + EQUITY

Assets are things owned that have exchange value, such as a bank account, land, machinery, etc.Liabilities are obligations or things owed to another. Equity represents what the owner hasactually invested as of a particular point in time. Accounting procedures, when properly followed,ensure that the accounting equation (e.g. the books) always stays in balance as new transactionsoccur.

Equity is made up of several elements:

EQUITY = INVESTED CAPITAL + RETAINED EARNINGS + CURRENT PERIOD NET INCOME

A Balance Sheet is a listing of a business’s assets, liabilities and equity at a specific point in time.

An Income Statement (also called a Profit and Loss Statement) is a summary of businessrevenues and expenses for a specific accounting period. An accounting period can be a month,quarter or year. Only revenues and expenses are placed on the income statement.

A Statement of Cash Flows shows the impact on cash flow of the operating, investing, andfinancing activities of a business during the accounting period. It reconciles the beginning andending cash balances. The Statement of Cash Flows may be prepared in two ways. The indirectmethod adjusts net income 1) to eliminate non-cash items such as depreciation and accrualadjustments and 2) to include changes which involved cash transactions but did not affect net

Introduction to Farm and Ranch Accounting Using Quicken 2

income, such as the purchase or sale of assets, acquisition or retirement of debt, and contributionor withdrawal of equity by owners. Under the direct method, cash inflows and cash outflows arelisted by type of receipt and payment, such as collections from customers, payments to suppliersand employees, collections and payments of interest, payment of income taxes, purchases and saleof assets, and the receipts/disbursements associated with debt and equity financing.

The beginning and ending Balance Sheet, along with the accounting period’s Income Statementand Statement of Cash Flows, provide information about the business. The Balance Sheet showsthe assets, liabilities and equity at a point in time. The Income Statement, less owner’swithdrawals, links the beginning and ending retained earnings for the period. The Cash FlowStatement links the beginning and ending cash balances and the other asset and liability accountson the Balance Sheet.

All transactions affect the Balance Sheet. Some transactions affect the Income Statement andBalance Sheet (e.g., a credit sale). Some transactions affect the Cash Flow Statement and BalanceSheet (e.g., collection of cash from earlier credit sale). Some transactions affect all threestatements (e.g., a cash sale).

QUICKEN ACCOUNT TYPES

A Quicken file is a collection of accounts and other information used in the record keepingprocess. Quicken accounts are the same as a general ledger’s permanent accounts for assets andliabilities. These permanent ledger accounts are called balance sheet accounts. Each Quickenaccount contains a register where the essential facts and figures of each transaction are recorded.In traditional accounting, this is analogous to recording transactions directly in a ledger account.

At the time of writing, Quicken has six types of accounts, namely: (1) a bank account forchecking, money market, and savings transactions; (2) a cash account for cash transactions; (3) acredit card account for charge transactions; (4) an asset account for asset transactions; (5) aliability account for changes in your debts and obligations; (6) an investment account for trackingof investments that fluctuate in price, such as stocks, bonds, and mutual funds. It is possible to usethe investment account type as an inventory account, but this will not be addressed in thisdocument.

Quicken does not have a specific account type for equity. Other liability accounts can be used fortransactions affecting equity. Example names for a liability account used as equity account areOwner’s Equity, Capital Contributions, Retained Earnings, Common Stock, Treasury Stock,Donated Capital, etc.

Traditional accounting methods assign revenue and expense transactions to temporary ledgeraccounts. Revenue and expenses are temporary accounts whose ending balances appear on theIncome Statement. They are used to show changes in the equity account during a singleaccounting period. At the end of the accounting period, the temporary accounts (revenue andexpense) are closed out (their balances reduced to zero). The resulting net income (loss) for thecurrent period is used to update the balance of the equity account.


The Quicken financial record keeping program does not use the traditional temporary accountsfor revenue and expenses. Instead, Quicken has adopted another term called category that is usedto classify transactions. There are two category types—income and expenses. When enteringtransactions in the register, both categories and accounts can be popped up on the screen in asingle Category and Transfer list. Income categories appear first, expense categories second, andaccounts last. Quicken automatically places brackets around account names. Quicken’s categorytype determines how a transaction changes equity. It is important to note that Quicken uses theterm “income” instead of “revenue.” Quicken’s accounting equation is:

Bank + Cash + Assets + Investments - Credit Cards - Liabilities = EQUITY.

EQUITY is not an account within Quicken’s structure. EQUITY is determined by subtracting thetotal value of the liability accounts from the total value of the asset accounts. The change inEQUITY for an accounting period is equal to the income categories less expense categories(assuming there are no capital contributions or withdrawals by the owners). EQUITY is adjustedthe moment an income or expense transaction is recorded. One can use a liability account torecord owner’s equity in the form of contributed capital and retained earnings, in which caseEQUITY is not changed.

To illustrate, a deposit recorded in a bank account register and assigned an income category willincrease EQUITY. On the Profit and Loss Statement, total income and net income increase. Onthe Balance Sheet, the bank account balance and EQUITY increase. The Cash Flow Report willshow increased inflow by the amount of the deposit. If transferred to Darwin’s Equity accountEQUITY would not change.

When a payment is recorded into a bank checking account and assigned an expense category,EQUITY will decrease. The Balance Sheet will show a decreased bank account balance anddecreased EQUITY. The Income Statement will show increased expenses and decreased netincome. The Cash Flow Report will show increased outflow by the amount of the payment.

All transactions are entered as either an “increase” or a “decrease” to an account balance. Quickenlabels increases in bank accounts as “deposit” and decreases as “payment.” Cash accounts labelincreases as “receive” and decreases as “spend.”

Quicken does not permit the use of income and expense categories when funds are transferredbetween accounts. For example, when cash is used to purchase a capital asset such as a tractor,and the user classifies the transaction as a transfer using an account name, net income andEQUITY do not change. The value is merely transferred from one asset account to another. Thatis, the account named for the capital asset increases by the same amount the bank asset accountdecreases. However, net income and EQUITY will change if the user misclassifies an assetpurchase using an expense category name, rather than an account name. The user must determineif the transaction affects EQUITY (using income and expense categories) or whether thetransaction is merely a transfer (a change in form) between asset and liability accounts. Examplesof a change in form are: converting a cash asset into a machinery asset, using cash to decrease theprincipal balance of a loan, and moving funds from checking to savings. In none of thesetransactions is equity changed.


Quicken automatically equalizes debits and credits and updates account balances as transactionsare recorded. However, Quicken forces the transaction to balance by treating uncategorizedamounts as changes to EQUITY (and net income). How EQUITY changes depends upon whichcolumn (increase or decrease) and account type (asset or liability) in which the uncategorizedamount occurs.

Quicken’s Cash Flow Report is a summary of the cash inflows and cash outflows for a specificperiod of time. The Cash Flow Report summarizes the money received from each incomecategory, the money spent for each expense category and transfers made to and from each asset,liability and investment account. The Cash Flow Report uses only transactions recorded in bank,cash and credit card accounts. Non-cash transactions recorded in other assets and other cashliability accounts do not appear on Quicken Cash Flow Reports.

Quicken has a number of memorized reports, such as Balance Sheet, Income Statement, and CashFlow. These are similar enough to standard formats to meet most needs. If not, they can beprinted to a disk file and edited with a word processor.

SAMPLE TRANSACTIONS USING QUICKEN

To illustrate the concepts, you are going to keep the financial records of a young farmer namedDarwin. Using the software program Quicken, you will maintain the records in a way that thefollowing reports can be prepared: beginning and ending balance sheet, accrual-adjusted incomestatement, and a cash flow.

To keep Darwin’s financial records separated from others, you create a new file inside theQuicken program. You need one file for Darwin’s farm business. You need a separate file foreach and every “set of books.”

After entering Quicken, the first step is set up a new Quicken file. Next, you name the new file“Darwin,” set the location for the new file (i.e., what drive/directory), and then select “neither thehome or business” categories. You will set up your own categories later.

Next, set up the following accounts as of December 31 of last year. This is equivalent to writingdown in the general ledger book the names of the permanent balance sheet accounts andtemporary revenue and expense accounts. Darwin’s Chart of Accounts includes the names of theaccounts and income and expense categories he plans to use.

Name Type BalanceChecking Bank 00.0GP Credit Card Credit Card 00.0Equipment Other Asset 00.0Unsold Wheat Other Asset 00.0Unused Supplies Other Asset 00.0Account Payable Other Liability 00.0Note Payable Other Liability 00.0Darwin’s Equity Other Liability 00.0


Next set up the following categories and indicate that they are tax related:

Name Type DescriptionSales IncomeSales Adjust Income Sales AdjustmentDepreciation ExpenseFuel ExpenseLabor Input ExpenseRepairs ExpenseRepairs Adjust Expense Repairs AdjustmentSupplies ExpenseSupplies Adjust Expense Supplies Adjustment

As a note in passing, the order in which accounts and categories are listed in reports is generallyin alphabetical order. This can be changed by using numbers in conjunction with account names. Ifcurrent assets are given lower numbers, fixed assets high numbers, and intermediate assetsnumbers in between, the balance sheet will list them in that order, which is in keeping with thecommon format of balance sheets. It also allows income and expense categories to be grouped ina more logical manner than might be the case if they were strictly alphabetical.

Open a Bank Account with $10,000 of Initial Equity (1)

To start his new business, Darwin opens a checking account with $10,000. Darwin’s investmentof $10,000 represents a contribution of assets to the business, which now owes him $10,000. Tokeep the books in balance, Darwin’s Equity account is increased by the same amount as theChecking account.

This transaction illustrates the increase in an asset (money in the bank) accompanied by anincrease in a liability (Darwin’s Equity). A cash inflow of $10,000 results from Darwin’s equityfinancing of this new business. Quicken - Record the transaction in the bank account (an asset) named Checking by making a

$10,000 deposit. In the category field, assign the name of the liability accountnamed “Darwin’s Equity” using brackets around the name.

When the transaction is recorded, Quicken automatically creates (transfers) thefollowing transaction which increases the liability account “Darwin's Equity”:


Observe that in a liability account, the field that increases the account balance appears first.

Traditional -Debit Credit

Checking Account (Asset)............................ 10,000Darwin’s Equity (Liability)........................... 10,000

Checking Account (Asset) Darwin’s Equity (Liab.)

Debit Credit Debit Credit

(Increase) (Decrease) (Decrease) (Increase)

(1) 10,000 10,000 (1)

Impact on Financial Statements of Transaction #1:

Chart 1 illustrates the effect of the first transaction on the balance sheet and cash flow. Shown onChart 1 are printed copies of two Quicken business reports. Darwin’s Balance Sheet Report is asof January 1st. The Cash Flow Report is for the period January 1 to January 1. (Only one day haselapsed.)

Line (1) on Chart 1 points to the effect of this transaction. On the Balance Sheet Report in thecolumn labeled 1/1/93 balance, the bank account named Checking shows a $10,000 balance. Theother liability account named Darwin’s Equity shows the $10,000 that the business owes toDarwin. Quicken computes EQUITY to be zero (0.00). Line (1) also refers you to the Cash FlowReport which shows an INFLOW from Darwin’s Equity during the period.


CHART 1


Purchase Equipment Using Money in Checking Account (2)

To acquire equipment for his new business, Darwin writes a check for $4,000 to the equipmentdealer.

The purchase of equipment and paying cash for the full amount illustrates the conversion of oneasset (money in the bank) into an asset (equipment). One asset is increased while the other onedecreases, a mere change in form. EQUITY does not change. There is a cash outflow for thisinvestment in new equipment.

Quicken - Record the transaction in the register of the bank account (an asset) namedChecking by making a $4,000 payment. In the category field, assign the name ofthe other asset account Equipment using brackets around the name.

When the transaction is recorded, Quicken creates (transfers) the followingtransaction which increases the other asset account Equipment.

Observe that in an asset account, the field that increases or decreases the accountbalance appears in the same order as a bank account.

Traditional accounting-Debit Credit

Equipment (Asset)................................................. 4,000Checking (Asset)................................................... 4,000

Checking Account (Asset) Equipment (Asset)


(Increase) (Decrease) (Increase) (Decrease)

(2) 4,000 (2) 4,000


CHART 2


Purchase Equipment with a Note Payable (3)

Darwin decides he needs additional equipment for his new business. He talks the Fair DealerEquipment Company into selling him $3,200 of equipment on credit.

This transaction illustrates the purchase of assets without using cash money. Two accounts arechanged. The increase in the other asset account Equipment is offset by the increase in the otherliability account Note Payable. EQUITY does not change. Since this financing activity does notuse any cash, it does not appear on the Cash Flow Report.

Quicken - This non-cash transaction does not change the checking account balance becauseno money changed hands. Record the transaction as a $3,200 increase in the otherasset account named Equipment. On the category line type the other liabilityaccount Note Payable with brackets around the name.

Quicken creates (transfers) the following transaction which increases the otherliability account Note Payable:

You could have recorded the transaction in Note Payable and allowed Quicken tocreate (transfer) the transaction in Equipment.


Equipment (Asset).......................................... 3,200Note Payable (Liability).................................. 3,200

Equipment (Asset) Note Payable (Liab.)



4,000 (3) 3,200

(3) 3,200


Impact on Financial Statements of Transactions #2 and #3:

Line (2) on Chart 2 points to the OUTFLOW of $4,000 to Equipment on the Cash Flow Report.The Balance Sheet as of 2/28/93 shows a decrease in the balance of the Checking (Bank) accountsince 1/1/93 of $4,000. Line (2) also points to an increase of $7,200 in the other asset Equipmentaccount of which $4,000 is the purchase of equipment with cash. The balance of $3,200 iscovered by transaction #3 discussed next.

Line (3) on Chart 2 points to the other liability Note Payable account on the Balance Sheetincreasing to $3,200. Line (3) also points to the other asset account Equipment which includesthis $3,200 ($4,000 from cash purchases and $3,200 credit purchase). The Cash Flow Report isnot affected by this transaction.

Purchase Labor Input Using Money in Checking Account (4)

To produce wheat, Darwin requires some additional help. Labor is a service which cannot bestored for later use. Service inputs represent an expense (an outflow of resources) as soon as theyare acquired. Darwin has an outflow of cash when he uses money in the checking account topurchase $1,000 worth of Labor Input.

In the previous transactions, two accounts have been changed. In Quicken, a transaction assignedan income or expense category affects only the balance of the account where it is recorded andthe computed value of EQUITY. Quicken calculates EQUITY by subtracting the total value ofthe liability accounts from the total value of asset accounts. Each time a transaction is recordedusing an income or expense category, EQUITY is recalculated.

Transactions assigned an expense category and recorded as a decrease to an asset accountdecrease EQUITY.

Transactions assigned an income category and recorded as an increase to an asset accountincrease EQUITY.

The various combinations of income and expense categories, the type of account where thetransaction is recorded, the change in EQUITY, and where reported are shown in the Appendix.

Quicken - Record the transaction as a payment in the bank account (an asset) namedChecking. Assign the expense category named Labor Input in the category field.



EQUITY-Labor Input (Expense Category)...... 1,000Checking (Asset)............................................. 1,000

Checking (Asset) EQUITY (Net Income)



10,000 4,000 (4) 1,000

1,000 (4)

Purchase Operating Inputs Using Money in Checking Account (5)

Darwin uses some physical inputs in the production process which can be used when purchased orstored for later use. If placed in storage upon purchase, they become assets. When stored assetsare removed from inventory to be used in the production process, they become an expense. If theresources are used upon purchase and never stored, they are an expense at purchase.

Darwin purchased some Supplies with a check for $500. Although these Supplies are storable,Darwin expects them to be used in the production process almost immediately upon purchase. Hedecides to treat all purchases of supplies as an expense when purchased, which reduces EQUITY.

Quicken - Record this cash transaction as a payment in the bank account (an asset) namedChecking. Assign the expense category named Supplies in the category field.


EQUITY-Supplies (Expense Category) .......... 500Checking (Asset)............................................. 500





10,000 4,000 1,000

1,000 (5) 500

500 (5)

Impact on Financial Statements of Transactions #4 and #5:

The Profit and Loss Statement (also called an Income Statement) is a summary of a business’sincome (revenue) and expense categories for a specific accounting period. The Profit and LossStatement includes all transactions assigned either an income or expense category. Uncategorizedtransactions are also included.

Lines (4) and (5) on Chart 3 refer to changes on the Profit and Loss Statement, to changes in theChecking account on the Balance Sheet, and to changes in OUTFLOW on the Cash Flow Report.Observe the $1,000 increase in Labor Input expense and the $500 increase in Supplies expense onthe Profit and Loss Statement. Notice the $1,500 decrease (of the $5,500 total decrease) in thebalance of the Checking account on the Balance Sheet. Notice the $1,000 and $500 cash outflowon the Cash Flow Report.

TOTAL INCOME/EXPENSE is Quicken’s term for Net Income. A loss of $1,500 on the Profitand Loss Statement reflects a decrease in assets resulting from Darwin carrying on the activitiesof the business. The $1,500 loss is reflected in the negative value of EQUITY on the BalanceSheet Report as of 3/31/1993.


CHART 3


Purchases Repairs on Open Account (6)

Darwin’s equipment needs $700 of repairs not covered by the warranties. Darwin makes thenecessary arrangements to purchase these Repairs on accounts (on credit). No money isexchanged.

Darwin’s friend, a financial accountant, says that the repairs are an expense when they arepurchased. Darwin’s other friend, an income tax accountant, says that since Darwin is a cash basistaxpayer, the cost of the repairs are not deductible until they are actually paid. Darwin doesn’tknow what to do, so he seeks the advice of his friend, a successful businessman.

The successful businessman says that both are correct. He suggests a compromise of waiting torecord the purchase as an expense until it is actually paid. However, if not paid by the end of theaccounting period, record the expense using a non-cash accrual adjustment. This compromisekeeps the financial accountant happy by correctly showing the repairs as this accounting period’sexpense for management purposes. The tax accountant is happy because it is not a deductibleexpense for a cash basis taxpayer. During the accounting period, no transaction is recorded.

Purchases Fuel using Credit Card (7)

This transaction is almost identical to the one above, except that Darwin purchases $800 of fuelusing his Gold Plated (GP) credit card. His tax accountant tells him that credit card charges aretax deductible in the accounting period they occur, whether paid or not. The tax accountant tellshim to record the transaction in the month it was incurred.

Quicken - Record the transaction in the credit card account (a liability) named GP CreditCard by making an $800 charge. The charge increases the credit card accountbalance. In the category field, assign the name of the expense category Fuel.


EQUITY-Fuel (Expense Category) ............. 800GP Credit Card Payable (Liability) .............. 800


EQUITY (Net Income) GP Credit Card (Liab.)


(Decrease) (Increase) (Decrease) (Increase)

1,000 800 (7)

500

(7) 800

Deposit Money from Wheat Sales into Checking Account (8)

Darwin produces wheat, selling 2,000 bushels for $6,000. A deposit of sales receipts increases thebalance of the bank account. EQUITY and cash inflow are both increased.

This transaction represents increasing an asset and increasing EQUITY by increasing an incomecategory.

Quicken - Record this transaction as a deposit in the bank account (an asset) namedChecking. Assign the income category named Sales.


Checking Account (Asset) ............................ 6,000EQUITY-Sales (Income Category) ............... 6,000




10,000 4,000 1,000 6,000 (8)

(8) 6,000 1,000 500

500 800


Impacts on Financial Statements of Transactions #7 and #8:

Line (7) on Chart 4 refers to $800 increase in Fuel expenses and change in TOTALINCOME/EXPENSES on the Profit and Loss Statement. On the Balance Sheet, Line (7) pointsto the $800 increase in the GP Credit Card account and the change in EQUITY. The OUTFLOWof $800 of Fuel on the Cash Flow Report is pointed to by Line (7).

Line (8) on Chart 4 refers you to the $6,000 increase in Sales on the Profit and Loss Statementand the Cash Flow Report and to the increased Checking account on the Balance Sheet. TOTALINCOME/EXPENSES on the Profit and Loss Report is the same as the change in EQUITY onthe Balance Sheet.

CHART 4


End-of-Accounting Period Accrual Adjustments

At the end of the accounting period (May 31), Darwin wants a good measure of his financialprogress. Darwin knows what his cash flow has been but he does not know if he has made aprofit. To measure net income, Darwin’s financial accountant says accrual adjustments arerequired.

Wheat in Inventory Awaiting Sale (9)

Darwin produced $1,000 worth of wheat which he has not sold. Darwin wonders if theadjustment for unsold wheat should be made to income (revenue) or expenses. His financialaccountant says the adjustment should be to expenses. His friend, the successful businessman,says the industry standard is to adjust income (revenues). Darwin decides to follow thebusinessman’s advice.

Darwin needs to record a transaction indicating that the wheat is in inventory awaiting sale. At thesame time, he needs to recognize the potential revenues as this accounting period’s income.

This end-of-accounting period adjustment illustrates increasing an asset (inventory of unsoldwheat) account accompanied by an increase in revenues. This is a non-cash transaction.

Quicken - Record the transaction as an increase to the other asset account named UnsoldWheat. Assign the income category named Sales Adjust.


Unsold Wheat Inventory (Asset) .................... 1,000 EQUITY-Sales Adjustment (Income Cat)....... 1,000

Unsold Wheat (Asset) EQUITY (Net Income)



(9) 1,000 1,000 6,000

500 1,000 (9)

800



Line (9) on Chart 5 points to the $1,000 increase in Sales Adjustment income category andEQUITY on the Profit and Loss Statement and the increase in Unsold Wheat and EQUITY onthe Balance Sheet. Transactions which do not change the cash accounts (bank, cash, and creditcard accounts) do not appear on the Cash Flow Reports.

CHART 5


Unused Supplies in Inventory (10)

Of the supplies purchased earlier, some valued at $100 are unused at the end of the accountingperiod. The actual supplies expense is $400, not $500, according to the financial accountant.

This end-of-accounting period adjustment illustrates increasing an asset (inventory of unusedsupplies) account accompanied by a decrease in expense.

Quicken - Record the transaction as an increase to the other asset account named UnusedSupplies. Assign the expense category named Supplies Adjust.


Unsold Supplies Inventory (Asset) ............... 100EQUITY-Supplies Adjust (Expense Cat) ..... 100

Unused Supplies (Asset) EQUITY (Net Income)



(10) 100 1,000 6000

500 1000

800 100 (10)

Impact on Financial Statements of Transaction #10 :

Line (10) on Chart 5 points to the $100 decrease in Supplies Adjustment expense category on theProfit and Loss Statement, an increase in Unused Supplies, and increased EQUITY on theBalance Sheet. This non-cash transaction does not appear to the Cash Flow Report.

Record Expenses Associated with Accounts Payable (11)

The open account on which the repairs (transaction 6) were charged has not been paid. Totalexpenses for the accounting period are understated by the amount of these unpaid repairs.

This end-of-accounting period adjustment illustrates increasing a non-cash liability (accountspayable) account accompanied by an increase in an expense. This is a non-cash transaction.


Quicken - Record this transaction as an increase to the other liability account namedAccounts Payable. Assign the expense category named Repairs Adjust.


EQUITY-Repair Adjustment (Expense Category) 700Account Payable (Liability)................................. 700

Accounts Payable (Liab.) EQUITY (Net Income)


(Decrease) (Increase) (Decrease) (Increase)

700 (11) 1,000 6,000

500 1,000

800 100

(11) 700


Line (11) on Chart 5 points to the $700 increase in Repairs Adjustment expense category anddecreased EQUITY on the Profit and Loss Statement and the increase in Account Payable anddecreased EQUITY on the Balance Sheet. This non-cash transaction does not appear on the CashFlow Report.

Record Expenses Associated with Depreciation (12)

Both accountants agree that the equipment has an expected life of 3 years (36 months). Thedepreciation expense for the period is $800 based on 4 months at $200 per month ($7,200/36).This end-of-period transaction illustrates decreasing an asset account named Equipmentaccompanied by an increase in expenses. This is a non-cash transaction.


Quicken - Record this transaction as a decrease to the other asset account named Equipment.Assign an expense category named Depreciation.


EQUITY-Depreciation (Expense Category) ... 800Equipment (Asset) ......................................... 800

Equipment (Asset) EQUITY (Net Income)



4,000 800 (12) 1,000 6,000

3,200 500 1,000

800 100

700

(12) 800


Line (12) on Chart 5 points to the $800 increase in Depreciation expense category and decreasedEQUITY on the Profit and Loss Statement and the decrease in Equipment and decreasedEQUITY on the Balance Sheet. This non-cash transaction does not appear on the Cash FlowReport.


SUMMARY OF FINANCIAL POSITION AS OF 5/31/93

Darwin’s Profit & Loss Statement (Chart 5) for the first five months of operation showsrevenues of $7,000. His Sales were $6,000 as a result of the cash sale. The inventory of unsoldwheat increase of $1,000 is reflected as non-cash Sales Adjustment.

On the expense side, Darwin had cash expenses of $1,000 for Labor Input and $500 for Supplies.Darwin used $800 of Fuel in his operation which he charged on his credit card. A decision wasmade to treat credit card charges as cash expenses when incurred.

At the end of the five month accounting period, Darwin allocated one-ninth (4 months ofexpected 36 month life) of the equipment cost as a non-cash Depreciation expense. He recorded a$700 non-cash Repairs Adjustment expense for the accounting period to reflected the unpaid billfor repairs. Darwin determined that $100 of supplies were unused. A non-cash accrual adjustmentof -$100 was recorded as Supplies Adjustment expense.

Darwin’s Profit & Loss Statement summarizes his revenues of $7,000 and expenses of $3,700for the five month accounting period. Revenues minus expenses yield a net income of $3,300.

Darwin’s Cash Flow Report (Chart 5) for the same period has cash inflows of $6,000 from cashsales and $10,000 from the initial equity contribution. The outflows were the cash payments forlabor and supplies ($1,000 and $500), a credit charge for fuel ($800), and a cash payment forequipment ($4,000). Inflows exceed outflows by $9,700 on the Cash Flow Report. This amountreconciles with the Balance Sheet as of 5/31/93 that shows the total of the bank and credit cardaccounts to be $9,700 ($10,500 less $800).

The Balance Sheet as of 5/31/93 shows total assets of $18,000 (cash $10,500; equipment$6,400; unsold wheat $1,000; and unused supplies $100). Total Liabilities and EQUITY total$18,000. The claims against the assets by outside parties total $4,700 (credit card payable $800;accounts payable $700; and notes payable $3,200). Darwin’s claim against the assets total$13,300 (initial equity contribution $10,000 and EQUITY earnings for the period $3,000). The$3,200 purchase of an equipment asset using a note payable liability does not appear on either theProfit & Loss Statement or the Cash Flow Report.


Summary of T-Accounts as of 5/31/93

Checking (Asset) GP Credit Card (Liability)

Debit (+) Credit (-) Debit (-) Credit (+)

10,000 4,000 800

6,000 1,000

500 5/31/93

10,500

Equipment (Asset) Account Payable (Liability)


4,000 800 700

3,200 5/31/93

6,400

Unsold Wheat (Asset) Note Payable (Liability)


1,000 3,200

Unsold Supplies (Asset) Darwin’s Equity (Liability)


100 10,000

EQUITY (Net Income)

Debit (-) Credit (+)

1,000 6,000

500 1,000

800 100

700

800


Next Accounting Period Transactions

Darwin continues to operate after May 31, 1993. His checkbook transactions for June are asfollows:

Number#13 Deposit $600 from sale of wheat to M.Y. Grainbuyer. The goods were from the

5/31/93 inventory of unsold wheat. Assign Sales as the category.

#14 Payment to Fair Dealer Equipment Company of $500 to reduce balance of chargesmade in April—see transaction #6. Assign Repairs as the category. Please notethat when the repairs were charged, they were not recorded as either an expense ora liability.

#15 Payment to GP Credit Card Company of $400 to reduce the balance of the chargesmade in April—see transaction #7. Assign the name of the credit card account GPCredit Card as the category. Quicken will place brackets around the account nameand treat the transaction as a transfer from Checking account to GP Credit Cardaccount. Remember, when the fuel was charged, it was recorded as an expense.

#16 Payment to Darwin of $150 to cover his living expenses. Assign the name of theother liability which holds the initial equity contribution Darwin’s Equity. Quickenwill treat the transaction as a transfer from Checking account to Darwin’s Equityaccount. Please note: this is not an expense.

End-of-Accounting Period Accrual Adjustments

Darwin decides a set of accrual adjusted financial statements are needed as of June 30, 1993. Toobtain the information needed to prepare the end-of-accounting period accrual adjustments, hetakes an inventory of his assets and liabilities as of 6/30/93. He finds that:

#17 His inventory of unsold wheat is $400.

#18 His inventory of unused supplies is $75.

#19 His accounts payable balance is $200.

#20 Equipment depreciation for one month is $200.

The balances of the remaining accounts are correct as of 6/30/93.

Record the above end-of-accounting period accrual adjustments, as of June 30, 1993, using theUpdate Account Balance feature under the Activities menu. (You will not find the Update featurewhen working with a bank account). If you have questions about how to record the non-cashtransactions, refer back to following transactions:


#9 for unsold wheat inventory,

#10 for unused supplies,

#11 for accounts payable, and

#12 for depreciation.

Summary of Financial Position as of 6/30/93

Darwin’s Profit & Loss Statement for June shows revenue of $0 (Chart 6). The $600 of cashSales income were wheat produced in the prior accounting period. The -$600 of Sales Adjustmentincome is a non-cash accrual adjustment which reflects the decrease in unsold wheat inventory.The sales of wheat produced and sold in June were zero.

On the expense side, equipment asset value decreased by $200 as a result of being in businessduring June. Darwin categorized the reduction in asset value as a non-cash Depreciation expense.

When Darwin paid $500 from Checking toward decreasing his accounts payable balance, heclassified the payment as Repairs expense. The -$500 recorded as an end-of-accounting periodaccrual adjustment in the accounts payable register was categorized as Repairs Adjustmentexpense. No actual repair expenses were incurred in June.

The unused supplies inventory decreased from $100 to $75. The decrease indicates that Darwinused $25 of supplies during June. A non-cash Supplies Adjustment expense was recorded.

Darwin’s actual expenses for June were the $200 decrease in equipment asset value and $25decrease in unused supplies inventory. The Profit & Loss Statement (Chart 6) shows a net lossfor June of $225. The Balance Sheet as of June 1 and June 30 indicates that EQUITY decreasedby $225 from $3,300 to $3,075.

The 6/30/93 Balance Sheet (Chart 6) compared to 6/1/93 reflects that Darwin’s Equitydecreased by $150 the amount of Darwin’s withdrawal for living expenses. The GP Credit Cardand Accounts Payable accounts decreases by the cash payments. The Unused Supplies andUnsold Wheat inventories also decreased.

The Cash Flow Report (Chart 6) shows a net cash outflow of $50. Inflows of $600 were fromcash sales. Outflows were $500 to the repair bill and $150 for Darwin’s living expenses. The useof money from the Checking to pay GP Credit Card does not appear on the report. The reason isthat the Quicken report layout option to include all transactions was not turned on. The balance ofthe bank and credit card accounts decrease from $9,700 ($10,500 less $800) to $9,650 ($10,050less $400), a decrease of $50.


CHART 6

FINAL COMMENTS

You’ve seen how Quicken could be used as a double-entry accounting program to produceaccrual adjusted financial statements. You must now make the management decision as to howyou will use Quicken. Many people may choose to keep only checkbook records, which involvesonly recording payments and deposits in a bank account register. Others may take the next step oftracking loan balances and payroll tax payables using other liability accounts. A few of you maychoose to produce quality financial statements. The beauty of Quicken is—the choice is yours.


APPENDIX

Category Recorded Balance EQUITY P & L Examples

Type of ChangeAccount in Changewhere Account in Cash Flow

Expense Bank & Cash Decrease Decrease CF & P&L Pay production expenses.Expense Asset Decrease Decrease P&L Record depreciation & end-of-year input

Expense Credit Card Increase Decrease CF& P&L Change production expenses.Expense Liability Increase Decrease P&L Record an increase in accrued expenses.

inventory decrease.

Expense Bank & Cash Increase Increase CF & P&L Deposit check for returned input items.Expense Asset Increase Increase P&L Record an end-of-year input inventory

Expense Credit Card Decrease Increase CF& P&L Receive credit for returned input items.Expense Liability Decrease Increase P&L Record a decrease in accrued expenses.

increase.

Income Bank & Cash Increase Increase CF & P&L Deposit sales receipts.Income Asset Increase Increase P&L Record an end-of-year output inventory

Income Liability Decrease Increase P&L Record decrease in unearned income.increase.

Income Bank & Cash Decrease Decrease CF & P&L Return overpayment of sales receipts.Income Asset Decrease Decrease P&L Record an end-of-year output inventory

Income Liability Increase Decrease P&L Record increase in unearned income.decrease.

*Investment accounts are not considered in this analysis.


GLOSSARY

Assets are items of value owned by a business entity measured in dollars. While important, goodhealth, outstanding management ability and highly productive employees are not accountingassets.

Liabilities are debts and obligations owed by a business entity. Liabilities are claims against theassets of the business by outside parties, such as lenders and the IRS.

Equity is the difference between the assets owned by the business and the liabilities owed by thebusiness. Equity is the owner’s claim against the excess of assets over liabilities. Equity is alsocalled capital and net worth. Equity may be as a liability that is owed to the owner of thebusiness.Invested Capital is the original and any additional investments that the owners has madeto the business.

Retained earnings are net income from prior periods which have been left in the business.

Current period net income is revenues less expenses for the current period.

Revenues are the net inflow of resources (increases in assets or decreases in liabilities) resultingfrom carrying out the activities of the business.

Expenses are the net outflow of resources (decreases in assets or increases in liabilities) resultingfrom carrying out the activities of the business.

Revenue and expense accounts are temporary equity accounts which are closed out (theirbalance transferred) at the end of the accounting period to retained earnings.


HINTS ON DOING THE EXERCISES

The publication, Introduction to Farm Accounting Using Quicken, ERI 95-03, is meantto be a study guide to teach some basics of accounting. It goes beyond the mere recording ofcheckbook transactions which most Quicken users do, by having the student go through theprocess of setting up and using several types of accounts and categories to produce severalreports necessary to monitor a farm business. Do not be concerned if the values and categories arenot that realistic. In same cases account and category names were chosen that described theaction or result. This makes it easier to understand the accounting process and interpret thereports.

If you study the transactions in the publication carefully, you will learn infinitely more thanif you just look for and enter the transactions as they appear in the book. After you completeeverything in the book, and all your reports match those on the Charts, you should be able to setup a set of books for a farm or business. However, you will probably have to refer back to thepublication from time to time even after you set up your accounting system. It is not alwaysapparent how and why entries are made. Understanding will come over a period of time as youkeep your books.

You may find the following instructions helpful as you work through the exercises in thebook:

1. After starting quicken, Create a new file named “Darwin,” as instructed on page 4.

2. Create the accounts and categories listed on pages 4-5.

3. Make entries into the books, starting with #1 on page 5. The number in brackets at theend of each subheading represents the transaction number. You may wish to put thisnumber in the Reference column where you normally put the check number. It will helppoint you to the corresponding lines in the reports.

4. Be sure you are in the correct register, and have set the date before making an entry.You are making entries for the year prior to the current year. Press Ctrl-A as ashortcut to select a different account.

5. After making one or more entries, call up the three reports mentioned in the publication. These are all Business reports, and are found by first selecting Business from the ReportMenu.

6. If you don’t get the same values on your reports, as shown on the Charts in thepublication, it could be for one of the following reasons:

a. The entry date was incorrect. This is easy to do because as you move from oneaccount to another, the date is reset to today’s date. This is probably the mostcommon error.


b. The beginning and ending transaction dates in the memorized report are notcorrect.

c. You recorded a transaction in an incorrect Account register.

d. You assigned the incorrect Category or transfer Account.

I. Probably the most difficult entries are the adjusting entries #13-20. It’s not that the entriesare difficult, it’s that you are constantly switching to a different Account, which resets thedate. If you don’t have the dates of these entries between June 1 and June 30, they will notbe picked up by the report, which should specify transactions only during this time period.

Should you discover a misspelled account or category after you have used it, do not deleteit and set up another. Rather, Edit the one you have. Quicken will automatically update alltransactions, preserving all the data.

REFERENCES

Hill, George D., Susan Hinton, and Matthew Von-Maszewski. Quicken - User’s Guide (Version6.0 for DOS), Manual: Intuit, 1992.

Horngren, Charles T., G. L. Sundem, and J. A. Elliott. Introduction to Financial Accounting. Prentice Hall. 1993

Stokes, Kenneth W. Introduction to Accounting Using Quicken. Unpublished. Texas A&MUniversity.

introduction to farm and ranch accounting

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